Will Our Housing Bubble Burst? TWICE?

We just got some great news! According to our local Association of Realtors, home prices in our neighborhood have increased 31% over last year. So why aren’t we rejoicing? Because this seems eerily reminiscent of how we felt living in South Florida from 2000 to 2008.

That’s right, we lived at Ground Zero during the boom and bust of the US housing bubble.

We watched our home value increase from the $305K we paid in 2000 to $800K in 2005. Then we watched it go back down. Fast. Very fast.

So fast, we couldn’t rely on Zillow to get an accurate (or even ballpark) price for our home’s value. I checked Zillow often back then and it wasn’t rare to see our home decrease by over $30K in one month. Ouch!

We now live in Southern Ontario, just outside of the GTA (Greater Toronto Area) and here are some of the headlines we’re seeing:

Toronto top city in the world at risk of a housing bubble, Global News, September 28, 2017

According to the Bloomberg article, the surge in Canada’s home prices makes the U.S. real estate boom of the mid-2000s look mild. Just take a look at this chart, reprinted from the Dallas Federal Reserve whose Globalization and Monetary Policy Institute maintains an international house price database.

Canada’s housing market barely flinched during the housing bust in the US. And the housing prices in Canada have only continued to shoot up – far eclipsing home prices of the friendly neighbors to the South.

And much like the US in the mid-2000s, first-time home buyers and low-income residents in Canada’s largest cities simply cannot afford home ownership. They are completely priced out of the market.

The craziness of this market has forced listing agents to use a sales tactic in which they “hold” offers; potential buyers are required to “register” offers by a specified time on a specified date. The buying agent notifies all potential buyers of the number of registered offers and the buyers are given a certain period of time (typically a few hours) in which to submit a bid. The seller then reviews the offers and either selects a winning bid or negotiates with some or all of the potential buyers.

According to our local Association of Realtors, in the past year homes in our neighborhood sold within an average of 7 days (which includes time on the market and time for the winning buyer to remove all contingencies from the contract, such as financing or home inspection.) The homes sold for an average of 114% above the listing price.

Fearing a repeat of the US housing bust, the province of Ontario has intervened to try and curb the rapid increase in home prices.

The centerpiece of Ontario’s new housing strategy is a 15% tax on home purchases by foreign buyers. This measure closely resembles the recent tax imposed on Vancouver’s foreign buyers and applies to buyers who aren’t citizens or permanent residents, as well as foreign companies. This tax is projected to affect about 8% of home buyers in the GTA.

Policymakers are also concerned about the ever-increasing level of debts Canadians carry.

The Canadian household debt reached a new record high this year: $1.68 of debt for every dollar of disposable income. Housing prices at record highs and interest rates at record lows worry regulators that there could be a spike in mortgage delinquencies if interest rates rise.

Please, not another foreclosure crisis!

To combat this, the Office of the Superintendent of Financial Institutions (OSFI) has proposed regulations that would require buyers (who are financially able to provide a down payment of more than 20%) to pass a stress test. For this test, the buyers must prove they could still afford their mortgage payments if interest rates rose by 2%. This stress test mimics the test already imposed on buyers who require mortgage insurance.

How did we fare during out first housing bubble pop in 2008?

We purchased our home in South Florida for $305K in 2000. Our renovations to the home totaled around $45K, so our total investment was approximately $350K.

We put the home up for sale in the summer of 2008, smack in the middle of the housing crisis. We needed to move due to a job opportunity for my husband. Priced at $550K, the home attracted plenty of showings, but no offers.

After 1 month, we lowered the price to $525K, but still no offers.

We had a relocation package from my husband’s new employer and it included a bonus of $20K if we sold the home without taking the buyout offer. We really wanted that bonus, so after another month, we lowered the price to a fire sale price of $500K. Still no offers.

After 1 more month, we accepted the buyout offer of $495K, netting us a total profit of $145K. Nothing to sneeze at, but nowhere near the $450K we would have pocketed if we had sold the home a couple of years earlier.

The home eventually sold for $475K. Three months later.

And while we felt very fortunate to have a buyout offer, others were not so lucky.

Our realtor told us the story of another realtor in her office who had purchased 9 homes on speculation. Nine homes. She bought at the peak of the market and as the market was dropping, she refused to sell, because no one knew when the market might turn around.

Trying to sell a house during a market downturn is like trying to catch knives. It’s a risky venture.

She eventually declared bankruptcy and all 9 homes were sold as foreclosures.

And now, how are we faring during our 2nd potential housing bubble?

We purchased our home in southern Ontario in the spring of 2013 for $380K.

We invested $65K to essentially redo the entire house. We added a master ensuite bathroom and converted storage in the basement into a bedroom by adding a large egress window. We also gutted the kitchen and replaced all of the flooring, lighting and fixtures.

Yes, that’s a lot for $65K, but I’m a frugal decorator (not cheap, just frugal.)

In total, we have invested $445K in the house.

To find out what our house would sell for, I recently spoke with a realtor. She said that if she were listing the house, she would list it for $650K, with expectations it would sell near $700K.

But what if the bubble pops? Will this implosion affect Canadians as severely as it impacted Americans?

Since we’re only 2 ½ years from hopefully relocating back to the US, we’re sweating it out till then.

And the images in this post?

Yep, they really are our 2 bubble houses. One is our former home in South Florida and the other is our current home in Canada. Can you guess which one is which?

Big hint, it has only snowed once on record in Miami – January 19, 1977!

2 thoughts on “Will Our Housing Bubble Burst? TWICE?”

I’m so surprised at the realtor story! 9!? For a realtor? To speculate? That’s not a very good realtor to know the signs of exuberance in the market. My goodness. 9!!!

My best friend (rich daughter princess) of very wealthy foreign Chinese told me her friends who brought in 2016 had 30% gains in one summer and although the market has gone down, it’s still not below 30% so they’re still ok. Her mom wanted to retire there so she reserved a new house to be built set to complete in 2019. I think the rich Chinese simply don’t care much about cost. Her mom paid cash.

I probably wouldn’t have believed a realtor could have made such a costly mistake if I didn’t trust the realtor who told us. But that was a wild time in South Florida. I really felt bad for the realtor. There was no way anyone could have predicted how fast and how far prices went down. But you’re right! 9! That’s crazy!